Corporate transparency as a defense against a stock price plunge: evidence from a market-crash context
Authors: Li-Chiu Chi, Tseng-Chung Tang, Ming-Yuan Chen
Journal: Chiao Da Management Review. Jun. 2012, 32(1): 137-162.
Keywords: Corporate transparency; Information disclosure; Stock price defense, Market crash; Variable importance ranking
Abstract:
Stock market crashes and the related financial contagion effects on stock price are important
issues in the field of finance. Preventing a sharp plunge in stock prices in reaction to a
market crash is an important risk management task. However, there has not been any discussion
about how a firm can better protect its stock value in a market crash. This study, being among
the first of its kind, sets out to examine the impact of the information transparency of a firm
on its ability to defend against a plunge in its stock price in the specific context of a
market crash, as well as to perform screening for vital variables affecting stock price defense
with a genetic algorithm as the variable importance ranking technique. Utilizing unique pooled
firm-event data for listed firms in Taiwan over the sample period 2003-2006, the results of
this study substantiate the conjecture that a firm with superior information transparency has
greater ability to defend its stock price on the day of a market crash. In addition, multiple
regression results show that stock price defense is negatively related to Beta, while trading
amount and P/E ratio are not statistically significant in explaining stock price defense.